No backing down on independent directors

The government’s feud with the not-for-profit super industry lobby, over independent director legislation, is at a deadlock.

Minister for Financial Services Kelly O’Dwyer has slammed the Bernie Fraser Review and resisted heated calls to amend the definition of “independence” in the government’s legislation to reshape super fund boards. She argues that to do so would be caving to vested interests.

The government wants to force super funds to appoint a minimum of one-third independent directors to their boards, including an independent chair.

It is a reform vehemently opposed by the industry fund establishment, which favours the ‘equal representation’ board model, of appointing directors from employer and union groups.

Few were surprised that the Fraser Review, commissioned by the Australian Institute of Superannuation Trustees (AIST) and Industry Super Australia, backed those groups’ prevailing view that independent directors are not needed.

The report was commissioned in December 2015 as an 11th-hour salvo to stave off the proposed legislation and was released on February 16, 2017.

O’Dwyer labelled the review a “delaying tactic to kill off reforms” and was scathing in her critique of its findings. She said there was nothing in the report that negated the need for the government’s independent directors bill.

As an alternative to the one-third rule, the Fraser Review recommended the industry adopt a mandatory code of conduct to lift board standards. The AIST simultaneously released a draft code, which O’Dwyer said appeared to “at best entrench the status quo and at worst further dilute the value of… superannuation fund boards”.

Defining independence

Two weeks earlier, at an exclusive gathering of chairs from some of the country’s biggest industry funds, O’Dwyer was implored to simplify the legislation to reflect the definition of independence applied to directors of ASX-listed companies. This could be a pragmatic way to break the deadlock that led to scuttling of the reforms last year, the chairs argued.

Even among those in the industry who see merit in mandating independents, there is widespread concern that the proposed standards would rule out too many well-qualified individuals.

These arguments did not sway O’Dwyer. She said such a compromise would be tantamount to caving in to those with vested interests.

“I am not interested in window dressing,” she said. “Some in the industry, not all mind you, are doggedly opposed to any change to improve governance, or any changes that attempt to create more transparency and accountability.”

She said the compulsory nature of super made high standards paramount.

“No one forces someone to buy Qantas shares, while people are forced to put their money into superannuation funds,” she said. “[Yet] the standard of governance and accountability of superannuation funds remains lower than the standards that apply to companies listed on the Australian Securities Exchange.”

This drew the ire of industry fund chairs, who argued it was laughable to say banks had stronger governance standards than super funds. One delegate, with experience on the boards of both retail and industry super funds, questioned how any directors of bank-owned super funds could be considered independent – given the parent company appoints all of them.

O’Dwyer did not address that concern directly but gave assurances the new rules “are not some ideological agenda” and would be applied consistently across the entire super sector.

Most bank-owned and retail funds now have a majority of independent directors, since the Financial Services Council made it a condition of membership in the wake of the 2010 Super System Review led by Jeremy Cooper. The 2014 Financial System Inquiry, led by David Murray, recommended the government introduce the one-third rule as a compromise.

O’Dwyer pointed to the reluctance of many funds to pursue mergers despite struggling to meet the prudential regulator’s scale test as evidence of the need for independents on boards to help combat conflicts of interest.

“You want decisions to be made in the best interest of members, not in the interest of some of those people sitting around the table who’d like to remain on particular boards and [continue] receiving fees for being on those boards,” she said.

The minister made her comments at the Conexus Financial Chair Forum, in Healesville Victoria, held on January 30-31. It was a gathering of chairs, deputy chairs and investment committee chairs.

More on the agenda

O’Dwyer said independents would also help funds cope with the need to develop more sophisticated retirement accounts for members. In December 2016, the government released a discussion paper seeking feedback on its plan to force all MySuper funds to offer retiring members a default option, tentatively called MyRetirement. This followed the 2014 Financial System Inquiry’s recommendation to force funds to offer comprehensive income products for retirement.

Another area of product and service design that is high on the agenda for super fund boards and the government in 2017 is group insurance.

O’Dwyer told the forum she would be following closely an upcoming Parliamentary Joint Committee inquiry into the life insurance sector. The inquiry, chaired by Liberal MP Steve Irons, is set to consider whether group life and total and permanent disability (TPD) insurance should remain a default inclusion within MySuper.

“It has been put to me that young people, under the age of 25 let’s say, generally speaking, don’t really have any assets or dependents; so why would it make sense for those people to pay for insurance as a default? … And that is an interesting question,” she said.

O’Dwyer said the government was “very mindful” of the problem of high insurance premiums eroding young people’s retirement savings balances.

“We are interested in exploring this… in actually looking at the data and the evidence and whether the default group insurance framework should stay the same or requires further refinement,” she said.

This article first appeared in the March print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.

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Investment Magazine provides in-depth, monthly analysis of trends and developments for all the businesses in which superannuation funds engage‚ including asset allocation, investment manager selection, custody and fund accounting, member administration, group insurance and compliance.